Mark Allen (IMF): Justice in Economics

By Mark Allen, published in Finance & Development, IMF in 15-09-2011

“Sedlacek’s interesting book is part of the construction project for a better economics and a more just world.”

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Some have put the financial crisis behind them. Calls to insert ethics into banking or to rethink the fundamentals of economics have been pushed aside by the practical men and women of business or economics eager to get on with life. Financial institutions have gone back to the old normal; vested interests are resurgent in the debate on regulatory reform, while in a striking example of confirmation bias, many economists have found that the crisis only confirmed what they already believed. And yet . . . . The crisis has devastated employment and household balance sheets, and has left a legacy of fiscal tensions that will weigh on governments for a generation. Deleveraging is proving painful, and problems of the euro area and deteriorating growth prospects worldwide indicate that further troubles may lie ahead. And in various places, economists are thinking about whether the financial sector has fundamentally distorted our societies and whether economics as a discipline needs to take a different tack. This erudite, original, and timely book is an exercise in metaeconomics, a look at the beliefs lying behind economics. Tomas Sedlacek, a leading Czech economist, considers the intellectual origins of some of the discipline’s assumptions and some alternative approaches that have been neglected in our precrisis consensus. All rational knowledge rests on some assumptions about what is important and how the world works. These are narratives or myths that we accept, often unconsciously, as giving the world meaning. In economics, such myths include the invisible hand, the perfect market, and rational, utility-maximizing homo economicus. Sedlacek draws on wide and eclectic reading to stress that economics is a cultural product. In the first four chapters, he trawls Sumerian, Old Testament, classical Greek, and Christian sources for their insights into economic issues. The next three short chapters examine the contributions to our economic thinking of René Descartes, Bernard Mandeville, and Adam Smith. The final section, “Blasphemous Thoughts,” consists of short essays applying the findings of the earlier chapters to such matters as whether greed is good, the concept of growth, whether utility or good should be maximized, the invisible hand, homo economicus, animal spirits, the proper role of mathematics in economics, and the nature of truth in economics and other sciences. For the classical economists, economics was part of moral philosophy. But since then, morality has been elbowed out as Mandeville’s “greed is good” approach displaced older views of both Jewish and Christian traditions, as well as those of Smith and David Hume. Similarly, the legacy of utilitarianism is an approach of individual utility maximization, rather than John Stuart Mill’s moral stress on collective utility—the greatest good of the greatest number. Virtually the only foothold that ethics has in modern economics is as the basis for well-functioning institutions in a prospering economy. Sedlacek suggests that the time is ripe for reexamining whether the products of the economy are indeed “Goods” in the moral sense. He stresses Smith’s explicit disagreement with Mandeville on whether private vice was needed to fuel the public good, thus acquitting Smith of the charge that he believed the pursuit of individual self-interest is a guarantee of a nation’s prosperity. In both The Theory of Moral Sentiments and The Wealth of Nations, Smith, in line with his close friend, Hume, professed that human society was held together by principles of benevolence and self-restraint, and the invisible hand that brought supply and demand together through the action of self-interest was just an ancillary mechanism. Indeed, the concept of the invisible hand owes more to Social Darwinism than to Smith. The search for a single principle underlying economic behavior has led to a discipline that takes self-interest as the driver of all economic phenomena, despite Smith’s explicit warning against trying to explain human actions with too limited a set of motivations. Man is reduced to homo economicus, an agent driven solely by rational choice. But neither Hume nor Smith allowed that human behavior could be explained by a single egotistical principle. They held that “feelings, not rationality, are the moving force behind human behavior.” Intellectual movements need time to gestate. A new intellectual edifice has to have a roof before people will abandon the old one en masse. It requires a critical mass of new formulations that give practical insight into current problems. But as Keynes put it, “soon or late, it is ideas, not vested interests, which are dangerous for good or evil.” Sedlacek’s interesting book is part of the construction project for a better economics and a more just world.